February 16, 2024

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by: kiran

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Tags: "Regulation"

Your Wake-Up Call for Non-Financial Misconduct

As we know, non-financial misconduct includes individuals’ conduct for issues such as (but not limited to) bullying, sexual harassment, and discrimination whether in or outside the workplace.

Such conduct reflects a firm’s culture -poor culture can lead directly to harm to consumers, market participants, employees and markets and has been a root cause of some major conduct failings – it therefore all links in with the FCA’s work on the Consumer Duty and ESG requirements all of which we have talked about in previous blogs.

Despite it being a regulatory focus for some time now, last year, the FCA stated on numerous occasions that they have seen a concerning increase in incidents involving non-financial misconduct. This despite the FCA having sent out a number of communications that cover this subject.

Back in January 2020, the FCA sent a letter to wholesale general insurance firms setting out their expectations on firms to be proactive in tackling non-financial misconduct and how they expect firms to identify what drives this behaviour and to modify those drivers as appropriate to shape proper conduct. They set out four key drivers of culture that can lead to healthy cultures and reduce the potential for harm:

  • Leadership – non-financial misconduct can only be effectively addressed if there is appropriate leadership.
  • Purpose – Purpose can be a powerful driver of healthy outcomes for employees, customers, and firms – but only if it is carefully thought through, resonates with employees, customers and other stakeholders, and is authentically embodied in the key drivers of culture.
  • Approach to rewarding and managing people –firms should have appropriate incentive structures and performance management processes in place.
  • Governance, systems, and controls – firms should reflect on any inconsistencies between implicit purpose and strategy and business practice, people management and formal governance, systems, and controls.

The FCA’s Portfolio Letter dated 20 September 2023 also raised this subject. The FCA made clear that the wholesale insurance market has a long way to go in having an inclusive culture with the appropriate channels for staff to feel safe to speak up and raise concerns and this includes the prevention and handling of non-financial misconduct.

This has all led to the most recent letter from the FCA on this subject in February 2024 which is an information request to all regulated Lloyd’s Managing Agents and London Market Insurers, and Lloyd’s and London Market Intermediaries (and MGAs) to complete a survey relating to incidents of non-financial misconduct within their firms.

The survey includes high level questions on:

  • Regulatory references
  • Governance and management information
  • Appointed Representatives
  • Diversity and inclusion policies
  • Remuneration, disciplinary and whistleblowing policies, and procedures

The FCA are requesting data that includes incidents that took place at the office, working from home, working offsite, and social situations related to work – including incidents that happened in any work-related capacity or event (e.g. Staff social events, off-site training and conferences, client entertainment or sponsored events).

The FCA will use this data to build a clear understanding of when and where non-financial misconduct occurs, to give them a baseline assessment of each sector and to inform their ongoing supervisory work.

What Firms need to consider:

The most recent information request should drive firms to look into this area again and ensure that they have appropriately considered and taken necessary action from previous information that the FCA has provided on this subject.

Firms must report instances of serious non-financial misconduct to the FCA promptly and ensure appropriate systems and controls are in place to deal with such misconduct.

Firms should therefore have effective systems in place to identify and mitigate risks relating to non-financial misconduct and should have the internal procedures to investigate allegations promptly and fairly, and to take appropriate action when allegations are upheld.

Firms should have conducted exercises to identify any gaps or shortcomings between the FCA’s expectations and their current arrangements – if you have not, or it has been some time since you last reviewed your systems and controls in this area, now is the time to act!

Should you require support in keeping your compliance or any other regulatory matter in good health, please do not hesitate to contact Padda Consulting.